Malaysia

As tech demand dives, exporters brace for
the worst

KUALA LUMPUR, Malaysia -- Malaysian stockbroker Linda Lim was all set to buy a new Toyota mini-van -- then terrorists struck the U.S.

Ms. Lim now worries that her industry could face layoffs as regional markets sink. That's not all: The construction company her husband works for had already pared back its workweek to three days before the September attacks and cut jobs, too. "There's so much uncertainty now," Ms. Lim says. "It's probably not a good idea to be spending 200,000 [ringgit] on a new car."

That doesn't bode well for Malaysia's economy.

As a global slowdown hits Malaysia's vital electronic exports sector and undermines oil prices, domestic consumers have become the country's best hope for mitigating the pain. To prop up local spending, Malaysia allocated 7.3 billion ringgit in two stimulus packages earlier this year. Next year's budget earmarks an additional 13.1 billion ringgit for outlays on public works, rural development and agriculture.

But as exports slump, layoffs mount and worried consumers cut spending, such measures may have a limited impact. "The key point is that Malaysia is one of the most open economies, in terms of exports-to-gross domestic product, and has probably the highest exposure to technology," says Sanjay Mathur, director of Asian Economics at UBS Warburg in Singapore. "There is no way they can escape a severe downturn."

The Malaysian government now forecasts the economy will grow by 1% to 2% this year and 5% next year. Private economists' predictions range from -1.2% to 1% for 2001, and from 0.7% to 2.5% for 2002.

Electronics exports, Malaysia's safety net during Asia's downturn in 1997 and 1998, could be the country's Achilles heel during the current downturn. According to the International Monetary Fund, Malaysia is the Asian nation most exposed to a slump in demand for electronics products. Electrical and electronics products comprised 64% of Malaysia's total export receipts last year, the highest proportion in Asia. Those exports were equivalent to 25% of Malaysia's GDP, compared to 19% in Singapore, the second-most exposed economy, 9% in the Philippines and 8% in Taiwan, according to the report.

Electronics export earnings in August slumped 25.4% from the year earlier, according to Malaysia's most recent data. Overall export receipts -- which grew 16% last year - will decline 10.6% this year, the Finance Ministry estimates.

Commodity exports, which helped prop up the economy during Asia's 1997-98 economic crisis, are also lagging. Prices for palm oil -- which accounts for about 5% of Malaysia's GDP and employs 10% of the workforce -- hit a record high of 2,000 ringgit a metric ton in 1999, but a supply glut later sent prices tumbling before leveling out at about 900 ringgit a ton. The government forecasts palm oil export receipts to expand 6.4% this year, not enough to boost economic growth much.

But officials worry that U.S. attacks on Afghanistan could disrupt shipments to key markets in Pakistan and India. Malaysian exporters have already been hit by an increase in freight rates and war-risk premiums on shipments to Pakistan and northern parts of India, which together take about 25% of Malaysia's palm oil exports.

Other primary industries are also in bad shape. Export receipts from logs and timber are forecast to fall 34% and 26%, respectively, this year, while earnings from petroleum exports will decline 14.5%, according to the Finance Ministry.

That leaves domestic consumption as a crucial growth engine. Indeed, a revival in consumer spending helped slow the rate of Malaysia's economic downturn in the first half. August automobile sales, a proxy for consumer spending, were 6% higher than July and a hefty 23% higher than August last year.

But consumers like Ms. Lim are now starting to put the brakes on. UBS Warburg predicts private consumption growth will drop to 0.3% in 2001 from 12.2% in 2000, and slump further to -1.3% in 2002.

The terrorist attacks in the U.S. also dealt a blow to tourism and palm oil exports, which contribute about 5% and 4%, respectively, to GDP. Tourist arrivals had increased 44% in the first half, compared to the same period last year, but dropped 30% after the attacks, according to the Tourism Ministry.

"The recovery will really be rather anemic unless we get some upside surprises from the U.S.," says Rajeev Malik, senior economist at JP Morgan Chase, who expects GDP growth to decline by 0.4% this year and rise by 2% in 2002. "The second half of next year should look better, but we have some way to go before then," Mr. Malik says.